TL Fahring | TaxConnections

12 Jul 2024

Supreme Court Upholds Section 965 Mandatory Repatriation Tax

On June 20, 2024, the U.S. Supreme Court issued its long-anticipated decision in Moore v. United States, in which a 7-2 majority upheld the constitutionality of the mandatory repatriation tax (“MRT”) under section 965 of the Internal Revenue Code, which came into effect as part of the Tax Cuts and Jobs Act of 2017.

As discussed previously here and he96re, the MRT is a one-time tax on U.S. shareholders of a controlled foreign corporation (“CFC”) based on the CFC’s post-1986 accumulated deferred foreign income.

The taxpayers in this case were a U.S. couple that invested in an Indian company that was a CFC. As a result, they were assessed the MRT. The taxpayers challenged the MRT on the grounds that it was a direct tax that was not apportioned as required under the Article I, Section 9, Clause 4 of the U.S. Constitution. Part of their argument was that the MRT did not meet the requirements of an income tax under the Sixteenth Amendment because there had been no realization event that would have caused the Indian CFC’s retained earnings to be taxed as income to the taxpayers. In this, the taxpayers relied on the Court’s 1920 decision in Eisner v. Macomber, which we’ve discussed here.

Delivering the Court’s majority opinion, Justice Kavanaugh found that the MRT was not a direct tax that needed to be apportioned under the Constitution. Kavanaugh argued that the appropriate question in this case was not whether realization is a constitutional requirement but whether the income in question could be attributed to the taxpayer (although he found that a realization event did occur when the Indian CFC earned that income). Kavanaugh looked to a long history of Congress permitting and the Court upholding the attribution of income earned by an entity to the entity’s owners. The taxpayers also conceded that such attribution in contexts other than the MRT was constitutional, including attribution required under Subpart F of the Internal Revenue Code, the subpart in which the MRT is found. Thus, a majority of the Court held the MRT to be constitutional.
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Written by TL Fahring | Posted in Section 965 Mandatory Repatriation Tax • Supreme Court Ruling • TaxConnections

25 Jun 2024

Treasury Department And IRS Target Partnership Basis-Shifting Transactions

On June 17, 2024, the Treasury Department launched “a new regulatory initiative to close a major tax loophole exploited by large, complex partnerships.”[1] The loophole: partnership basis-shifting transactions.

In these transactions, a single business that operates through many different legal entities . . . enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. . . . For example, a partnership might shift tax basis from property that does not generate tax deductions (such as stock or land) to property that does (such as equipment). Taxpayers may also use these techniques to depreciate the same asset over and over.[2]

Treasury claims that such “transactions defy congressional intent to avoid tax liability with little to no other economic consequences for the participating businesses.”[3]

To try to fight this problem, the Treasury is issuing Notice 2024-54, announcing its intent to publish proposed regulations to eliminate the tax benefit from these transactions, Proposed Regulation 1.6011-18, which would require taxpayers and their material advisers to report their participation in partnership basis-shifting transactions, and Revenue Ruling 2024-14, which finds that certain partnership basis-shifting transactions lack economic substance and will not be respected.

Treasury believes that this initiative could raise more than $50 billion in tax revenue the next 10 years.[4] These moves come as the Internal Revenue Service has been increasing audit activity involving partnerships after years of such efforts being “severely underfunded.”[5]

Written by TL Fahring | Posted in Partnership Basis-Shifting Transactions

21 Jun 2024

Proposed Regulations On Loans Of Cash And Property From Foreign Trusts

On May 8, 2024, the Treasury Department issued proposed regulations regarding the classification, taxation, and reporting of foreign trusts. The proposed regulations were issued for sections 643(i), 679, 6039F, 6048, and 6677 of the Internal Revenue Code. The proposed regulations would largely incorporate guidance that the IRS provided in Notice 97-34, with some modifications.[1]

In this post, we’ll take a look at the proposed regulations for section 643(i).

Background

Original Enactment

As first enacted in 1996, section 643(i) of the Internal Revenue Code provides that if a non grantor foreign trust directly or indirectly makes a loan of cash or marketable securities to a United States person who is a grantor or beneficiary or who is related to a grantor or beneficiary of the foreign trust, then that loan is treated as a distribution by the foreign trust to that grantor or beneficiary (a “Section 643(i) distribution”).[2]

A Section 643(i) distribution is treated as having been made by a trust that doesn’t distribute only current income.[3] If adequate records are not provided to determine the proper treatment of a distribution from a foreign trust, then the distribution is treated as an accumulation distribution subject to taxation under subpart D of the trust provisions.[4]

Section 643(i) allows the Treasury Department to make exceptions to this treatment by regulation.[5] The legislative history for Section 643(i) indicates that Congress intended that the Treasury Department issue regulations providing an exception for loans of money or marketable securities with arm’s length terms.[6]

Notice 97-34

On June 23, 1997, the IRS issued Notice 97-34, which provided guidelines an exception to section 643(i) for loans of cash or marketable securities in the case of a “qualified obligation.” [7] The notice defined a “qualified obligation” and provided rules for additional loans between the same parties as well as for the distribution that would result when an obligation ceased to be a qualified obligation.[8] The notice also provided guidance on how to determine the tax consequences of a Section 643(i) distribution.[9]

Written by TL Fahring | Posted in Foreign Trusts

05 Jun 2024

National Taxpayer Advocate Calls Out IRS On International Information Return Penalties

In a blog post on May 21, 2024, National Taxpayer Advocate Erin Collins called for the IRS to cease its systemic assessment of international information return penalties and for Congress to amend the Internal Revenue Code to provide taxpayers with a prepayment forum in U.S. Tax Court to challenge the assessment of these penalties.

Collins pointed out that, contrary to expectations, these penalties disproportionately affect lower- and middle-income individuals and small to midsize businesses. An array of penalties may be assessed against U.S. persons in connection with failure to report certain foreign assets and activities, including the receipt of gifts from a foreign person over a certain amount, ownership of foreign business entities or trusts, and the transfer of money or property to certain foreign persons. Taxpayers often don’t even know they have these information reporting requirements and are shocked when they receive penalty assessments from the IRS that may be completely out of line with any unreported taxes at issue.

While the IRS can abate these penalties if taxpayers have reasonable cause for failure to file, the IRS often doesn’t immediately consider these requests for abatement before assessing them. Instead, taxpayers are often left with the long, torturous, and expensive process of attempting to get these penalties abated after assessment.

Collins notes:

By systemically assessing penalties when taxpayers willingly come forward and file their late returns, the IRS discourages voluntary compliance. When taxpayers know that voluntarily filing is going to result in a crushing penalty that is going to be difficult and costly to challenge, how many taxpayers decide not to file and hope the IRS doesn’t find them?

Written by TL Fahring | Posted in TaxConnections

14 May 2024

Tax Court Decision Shows Potential Pitfalls When Claiming Settlements Qualify For Federal Income Tax Exclusion

A recent Tax Court case illustrates the importance under current case law of thinking about the tax consequences of a potential verdict or settlement early on and attempting (if the facts allow) to establish a basis for exclusion from federal income tax throughout the course of litigation.

In Estate of Finnegan v. Comm’r, T.C. Memo. 2024-42, the question before the Tax Court was whether payments under a settlement of certain constitutional and civil rights claims were excluded from income under section 104 of the Internal Revenue Code.

The Indiana State Police (“ISP”) had investigated husband and wife taxpayers in Estate of Finnegan for medical neglect resulting in the death of their daughter at the age of fourteen. Criminal charges were filed against husband and wife taxpayers but later were dismissed.

Nevertheless, the Indiana Department of Child Services (“DCS”) removed the remaining children from husband and wife taxpayers’ home. While the children were eventually returned home, DCS continued its investigation.

Husband and wife taxpayers filed suit in state court against DCS to invalidate certain determinations that DCS had made against them, including (1) that there was medical neglect in connection with their deceased daughter based on the postponement of a cardiology checkup; (2 that their daughter’s death was caused by physical abuse; and (3) that their remaining children were in a life/health endangering environment. The state court found in husband and wife taxpayers’ favor.

Husband and wife taxpayers along with their children sued various employees of the State of Indiana in federal court for their actions after their daughter’s and sister’s death. The suit was brought under 42 U.S.C. § 1983 for violation of their civil rights under state law, federal law, and the First, Fourth, Sixth, and Fourteenth Amendments to the U.S. Constitution. A jury awarded the taxpayers compensatory damages totaling $31.5 million, with amounts specifically awarded for violations of each taxpayer’s constitutional rights. Ultimately, the case was settled for $25 million.

Written by TL Fahring | Posted in TaxConnections

17 Apr 2024

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

The Treasury Inspector General for Tax Administration (“TITGA”) recently has released a report on the status of efforts by the Internal Revenue Service (“IRS”) to develop the digital asset monitoring and compliance strategy mandated by Congress with the Inflation Reduction Act of 2022.

For purposes of federal taxation, a “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”[1] This includes non-fungible tokens and virtual currencies.

As part of the Infrastructure Investment and Jobs Act of 2021, Congress had amended sections 6045 and 6050I to require reports from digital asset brokers and from any person engaged in non-financial trades or business who receives more than $10,000 at least in part in digital assets.[2]

TITGA noted that the IRS has created the Digital Asset Advisory Committee (“DAAC”) in February 2022 to provide service-wide collaboration, planning, and information sharing with respect to digital assets. The DAAC has the following goals:

Written by TL Fahring | Posted in TITGA reports

12 Apr 2024

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

Coordinating collaboration, planning, information sharing, and executive leadership over the IRS’s digital asset strategy related to its compliance programs.
Identifying and monitoring the management of digital asset programs and resources to ensure accountability, transparency, and consistency.
Recommending funding and investment opportunities for digital asset technology and operational needs such as tracing software, or basis computational tools.
Reviewing digital asset related activities, as needed.

Written by TL Fahring | Posted in Digital Assets • TIGTA

16 Feb 2024

What To Know When Selling The Assets Of A Business

In an “applicable asset acquisition,” the sale of the assets of a business may be subject to certain allocation and reporting requirements for federal income tax purposes. It’s essential for the seller and purchaser to be aware of these requirements.

What’s an Applicable Asset Acquisition?

An “applicable asset acquisition” is any transfer of assets which constitute a trade or business and with respect to which the transferee’s basis in such assets is determined wholly by reference to the consideration paid for such assets.[1] A group of assets is a trade or business if its character is such that goodwill or going concern value could under any circumstances attach to those assets.[2]

Goodwill is the value of a trade or business attributable to the expectancy of continued customer patronage, which may be due to the name or reputation of a trade or business or any other factor.[3] Going concern value is the additional value that attaches to property because of its existence as an integral part of an ongoing business activity.[4] Going concern value includes the value attributable to the ability of a trade or business (or a part of a trade or business) to continue functioning or generating income without interruption notwithstanding a change in ownership.[5] It also includes the value that is attributable to the immediate use or availability of an acquired trade or business, such as the use of the revenues or net earnings that otherwise would not be received during any period if the acquired trade or business were not available or operational.[6]

The basis of an asset generally is its cost as adjusted for various items including depreciation or amortization.[7] Thus, when an asset is sold, its basis generally is the consideration paid for that asset.[8]

What Happens in an Applicable Asset Acquisition?

Written by TL Fahring | Posted in Selling Assets Of A Business

09 Nov 2023

Treasury Department Takes Aim At Convertible Virtual Currency Mixing

The Treasury Department has recently issued a notice of proposed rulemaking under the Bank Secrecy Act regarding the reporting of convertible virtual currency (“CVC”) mixing.[1]

Perceived Problems with CVC Mixing

The Treasury Department explains that “[t]he public nature of most CVC blockchains, which provide a permanent, recorded history of all previous transactions, make[s] it possible to know someone’s entire financial history on the blockchain.”[2] CVC mixing involves various methods “intended to obfuscate transactional information, allowing users to obscure their connection to the CVC.”[3] These methods include:

“combining CVC from two or more persons into a single wallet or smart contract and, by pooling or aggregating that CFC, obfuscating the identity of both parties to the transaction by decreasing the probability of determining both intended”;[4]
“splitting a single transaction from sender to receiver into multiple, smaller transactions, in a manner similar to structuring, to make transactions blend in with other, unrelated transactions on the blockchain occurring at the same time so as to not stand out, thereby decreasing the probability of determining both intended persons for each unique transaction”; [5]
“coordinat[ing] two or more persons’ transactions together in order to obfuscate the individual unique transactions by providing multiple potential outputs from a coordinated input, decreasing the probability of determining both intended persons for each unique transaction”;[6]
“use of single-use wallets, addresses, or accounts . . . that have the purpose or effect of obfuscating the source and destination of funds by volumetrically increasing the number of involved transactions, thereby decreasing the probability of determining both intended persons for each unique transaction”;[7]

Written by TL Fahring | Posted in TaxConnections • Virtual Currency

25 Oct 2023

Texas Tax Roundup… Insurance, Data Processing, Video Games!

Texas Tax Roundup | September 2023 | Insurance, Data Processing, Video Games!

Hi folks! Welcome back to the Texas Tax Roundup, September 2023 edition. We got some insurance services, data processing services, and amusement services (a pretty sales tax heavy last month). Let’s see what went down!

Rules

Battery Sales Fee

34 Tex. Admin. Code § 3.711, 48 Tex. Reg. 5739 (Sept. 29, 2023)—The Comptroller adopted proposed amendments to Rule 3.711, relating to the battery sales fee, without change. These amendments implement S.B. 477, 87th R.S. (2021), which required marketplace providers to collect applicable fees related to the sale of lead-acid batteries.

Notable Additions to the State Tax Automated Research (“STAR”) System

Sales and Use Taxes

Insurance Services

STAR Accession No. 202308020L (Aug. 21, 2023)—In this private letter ruling, the Comptroller determined the taxability of various services provided by an employment benefit recordkeeping services provider, retirement plan third-party administrator, and government savings facilitator. The Comptroller found that the taxpayer’s flex spending account services (which involved the design, implementation, and administration of employee health reimbursement and flex spending accounts), Omnibus Budget Reconciliation Act (COBRA) administration services, and retire plan administration and 401(k) recordkeeping services were nontaxable services. The taxpayer’s Affordable Care Act (ACA) comprehensive and eligibility verification service (which involved evaluating employees’ eligibility or qualification for insurance coverage under the ACA) was a taxable insurance service.[1] The taxpayer’s ACA reporting service (which involved the automated generation, printing, distribution, and filing of IRS Forms 1094-C and 1095-C) was a taxable data processing service.[2]

Written by TL Fahring | Posted in Data Processing Taxes • Insurance Taxes • Video Game Taxes

04 Oct 2023

Seller-Financed Motor Vehicle Sales, Rolling Stock, Seeds!

Howdy folks, and welcome back to the Texas Tax Roundup. This August was a barren wasteland of sun and heat, but the Comptroller still managed to wrangle up some interesting tax issues. Let’s see what they came up with!

Rules

Proposed Rules

Battery Fees

34 Tex. Admin. Code § 3.711 (48 Tex. Reg. 4379 (Aug. 11, 2023))—The Comptroller proposes amendments to this rule that primarily implement legislative changes which require marketplace providers to collect fees related to the sale of lead-acid batteries.

Notable additions to the State Tax Automated Research (“STAR”) System

Natural Gas Production Tax

Determining Market Value

Comptroller’s Decision No. 118,189 (2023)—The ALJ upheld the Comptroller’s partial denial of a natural gas producer’s refund claim of natural gas production based on the producer’s amended marketing costs that included “hot oil treating, gas meter testing and inspection, electric repair, electrical installation, electrical material, valves and connectors, gas pipeline, ES electrical installation, engineering and patriot supervision, electrical material and automation, and gas flowline and installation.” The natural gas production tax is 7.5% of the market value of gas produced and saved in the state by the producer.[1] The market value of gas is its value at the mount of the well from which it is produced.[2] Market value is determined by subtracting the producer’s actual marketing costs from the producer’s gross receipts from the sale of the gas.[3] Marketing costs include: (1) costs for compressing the gas sold; (2) costs for dehydrating the gas sold; (3) costs for sweetening the gas sold; and (4) costs for delivering the gas to the purchaser.[4] Marketing costs do not include: (1) costs incurred in producing the gas; (2) costs incurred in normal lease separation of the oil or condensate; (3) insurance premiums on the marketing facility.[5] The producer in this hearing did not provide any evidence of which of its claimed costs were allowable as marketing costs.

Motor Vehicle Sales And Use Tax

Seller-Financed Motor Vehicle Sales
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Written by TL Fahring | Posted in Motor Vehicle Sales

01 Sep 2023

Texas Tax Roundup: Mixed Beverages, Mixed Beverages, Mixed Beverages!

Hiya, folks, and welcome back to another edition of Texas Tax Roundup. It seems like a lot of people might have been taking a vacation in July, getting a break from this heat, so not all that much to talk about—other than, for some reason, mixed beverages. Let’s see what happened!

Notable Additions to the State Tax Automated Research (“STAR”) System

Mixed Beverage Taxes

Audit Procedures/Additional Penalties

Comptroller’s Decision Nos. 118,594, 118,595 (2023)—The ALJ determined that the assessment of mixed beverage taxes against a taxpayer was not in error when the assessment was based on a pour test at the taxpayer’s establishment, sales receipts from the pour test, a price sheet, and vendor-reported purchases, and the taxpayer didn’t provide any evidence to support their claim that the assessment was wrong. The ALJ also upheld the assessment of a 50% additional penalty when the error rate for the assessments was approximately 86% and the taxpayer did not establish a plausible explanation for underreporting.

Comptroller’s Decision Nos. 117,911, 117,912 (2023)—The ALJ upheld the assessment of mixed beverage gross receipts tax and mixed beverage sales tax when the assessment was based on sales records and the taxpayer’s mixed beverage gross receipts tax and mixed beverage sales tax reporting and the taxpayer didn’t provide any evidence showing error. The Comptroller also upheld a 50% additional penalty when the taxpayer’s overall error rate exceeded 50% for each assessment and there was not plausible explanation for the underreporting.

Comptroller’s Decision Nos. 118,107, 118,108, 118,109 (2023)—The ALJ agreed with the assessment of mixed beverage taxes and sales and use taxes against a taxpayer that operated a restaurant and full-service bar when the taxpayer failed to provide any records demonstrating that the audit was in error. The ALJ further upheld an assessment of an additional 50% penalty against taxpayer in connection with the mixed beverage tax assessment because of the taxpayers had an overall error rate of 61.87% in the mixed beverage gross receipts tax audit and 58.3% in the mixed beverage sales tax audit with no plausible explanation for the underreporting.

Personal Liability
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Written by TL Fahring | Posted in Beverage Tax • Texas Tax Law